KOITO MANUFACTURING CO., LTD.

Domestic production sites are concentrated in Shizuoka Prefecture, and if a large-scale natural disaster such as a Nankai Trough megaquake occurs, it could have a material impact on business continuity and performance through production halts, disruption of the logistics network, and supply interruptions to customers. If the entire supply chain is affected in addition to wind and flood damage, factory fires, or equipment failures, there is a risk that the impact could become prolonged. As countermeasures, the company is advancing seismic diagnosis and reinforcement, disaster stockpiling, and cloud migration of data centers, but states that complete avoidance of compound disasters exceeding expectations is difficult.

Inconsistencies, insufficient verification, and process variability at each stage of product development and mass production could lead to market defects, recalls, and product liability (PL) issues. As the ratio of control systems and electronic components increases with the growing electrification and sophistication of automobiles, the scope of impact and response costs in the event of defects are expanding. The company utilizes design FMEA, rapid information sharing and root-cause analysis through SIBR, and strengthening of the quality control system at overseas sites through GQAM, but states that quality risk is increasing as products become more complex.

In addition to external threats such as targeted cyberattacks, ransomware infections, and unauthorized access, internal threats such as employee misconduct, operational errors, and inappropriate use of cloud services could result in leakage of confidential information, system outages, and suspension of production and shipments. In the automotive industry, there have been cases of attacks targeting the entire supply chain and resulting parts supply stoppages, with impacts extending broadly. The company has implemented technical and organizational measures such as EDR deployment, multi-factor authentication, penetration testing, and comprehensive global cyber insurance, but states that continued response to increasingly sophisticated and advanced attacks remains a challenge.

If even a single business partner becomes unable to supply due to natural disasters, geopolitical risk, trade policy, semiconductor shortages, or other factors, it could seriously affect the production activities of the Group. Given the characteristics of the automotive industry, where business partners exist in multiple layers down to Tier 2 and beyond, risk identification and response are difficult, and if increases in raw material and energy prices cannot be absorbed through price pass-through or rationalization, this could also lead to lower profitability. The company is advancing the introduction of a supply chain information management system, establishing alternative procurement and multiple purchasing routes, and reducing costs through VA/VE activities, but states that it is difficult to single-handedly control risk across the entire supply chain.

The Group is subject to a wide range of laws and regulations, including antitrust law, export-related laws, automotive safety standards in various countries, and labor and environmental laws. If violations, improper transactions, inadequate export control, harassment, or other issues occur, this could have a material impact on business performance and social credibility through administrative sanctions, fines, damages, and loss of trust. In recent years, there have been a series of certification and quality fraud cases and improper transaction cases in the automotive industry, further heightening the importance of compliance. The company is strengthening its company-wide framework through education and awareness activities by the Compliance Promotion Office, J-SOX compliance, and the launch of human rights due diligence based on the “Koito Group Human Rights Policy” established in FY2024 (ending March 2024).

With the declining birthrate, aging population, and the advancement of CASE and software-driven transformation, competition to acquire science and engineering talent as well as software and AI talent is intensifying. If core personnel attrition, recruitment difficulties, or insufficient talent development occur, this could affect medium- to long-term competitiveness and business continuity through a decline in technological development and quality control capabilities. In addition, shortages and insufficient development of overseas expatriates raise concerns regarding the management and governance of overseas sites. The company is advancing improvements in treatment, revisions to personnel systems, strengthening of recruitment activities, and development of local management talent, but expects competition for talent acquisition to continue intensifying.

Technological and price competition is intensifying due to declining sales by Japanese automakers in the Chinese market, the rise of emerging-market manufacturers, and ECU integration. If delays occur in new product and new technology development or if cost competitiveness declines, this could lead to reduced orders and deteriorating profitability. The company is expanding sales of ADB, ECU, and LDM, strengthening sales activities toward non-Japanese manufacturers, and developing new technologies through information gathering at events such as CES and joint research with universities, but rapid response to changes in the market and customer environment remains an ongoing challenge.

With production sites in 11 countries worldwide and a high ratio of overseas sales, changes in tax systems, environmental regulations, and trade policies in each country, protectionist policies and additional tariffs, geopolitical risks such as the U.S.-China conflict, the situation in Ukraine, and the situation in the Middle East, and social disruptions such as terrorism and infectious disease outbreaks could result in production halts, supply delays, cost increases, and lower profitability. The company is advancing information gathering and risk identification centered on the International Division, and reducing foreign exchange impact through the promotion of local production and local procurement, but states that overseas risks are diverse and change rapidly, making it difficult to foresee and avoid all risks in advance.

Items denominated in local currencies at overseas affiliated companies may be affected by exchange rate fluctuations when translated into yen, impacting business performance and financial condition, and in general, yen appreciation is stated to potentially have an adverse effect on the Group's performance. Given the high ratio of overseas sales, the impact of exchange rate fluctuations on performance is correspondingly significant. The company strives to reduce the impact of exchange rate fluctuations through the promotion of local production and local procurement, but complete hedging remains difficult.

Shortages and insufficient development of overseas expatriates raise concerns regarding the management and governance of overseas sites, creating a risk that local compliance with laws, safety management, labor management, and information security measures may become inadequate. The company is advancing business operations and governance strengthening centered on expatriates dispatched from headquarters, development of local management talent, and strengthening cooperation with overseas affiliated companies, but the complexity of managing multinational sites remains a challenge.